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Back to the basics


20160731ep02After taking a beating from overseas regulators for the past few years, analysts are finally sounding marginally cautious about the fortunes of pharma companies in India. The last fortnight has seen some marquee companies announce that they’ve been able to satisfactorily settle manufacturing issues red flagged by the US FDA during plant inspections. But will the learnings of the last year last? Only time will tell.

A sector update from Motilal Oswal Securities Limited (MOSL) dated July 8 asks if the tide is turning, citing closure reports filed by Lupin, Cadila Healthcare and Alembic. But Lupin is only partially out of the woods. Though its July 2015 US FDA inspection is settled, the March 2016 closure report for nine 483s from the same plant is still pending.

Similarly, Cadila Healthcare is still under a warning letter though 483s raised during inspections dating back to August and September 2014 are settled. Alembic’s Kharkhadi plant is now in the clear but the four 483s from the Panelav facility are still pending. The fact that two other API facilities located at Panelav passed an inspection as recently as June this year without any 483s could mean that the past inspections have resulted in internal corrections, be it greater awareness among the staff as well as corrections in processes and investments in quality systems.

Are we finally seeing some light at the end of the tunnel? It’s still a long way off. The MOSL report shows that around 10 pharma companies from India await resolution of US FDA enforcements, dating back to February 2013. But maybe we’ve started to claw our way back and the tough times will translate into hard won insights.

Just as pharma companies have had to examine their basic framework and correct flaws which had crept into their DNA, this slack period on the BSE Healthcare Index, after seven years of strong earnings, has forced analysts and investors to re-examine the fundamentals of pharma stocks.

A report dated July 9 from JM Financial Institutional Securities Limited (JMFISL) highlights that the emphasis on sustainable earnings driver, robust base businesses, deep product pipelines and long-term R&D initiatives is fundamentally altering the return profile (both quantitative as well as qualitative for the sector).

The sector is entering a new regime, posits the JMFISL report,where the high return ratios are firmly in the past. Pharma companies have exhausted all the quick fixes of in-licensing products, brand acquisitions and technology platforms, says the JMFISL report, even while most pharma CEOs are setting aside a higher percentage of their revenues for higher R&D spends.

This might be bad news in terms of stock investments, but having covered the pharma beat for close to two decades, it is music to industry observers. Have pharma CEOs finally got the guts to take their eyes of the near term gains, tighten their belts, and invest in the long term? And more importantly, have they been able to convince their shareholders and investors, that it is time to look at a longer horizon?

Viveka Roychowdhury

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